Q&A introduction to AAA Reserve Currency
What is AAA Reserve Currency?
AAA Reserve is a digital stablecoin — a cryptocurrency that has low price volatility, and can be used by people who are looking for a safe-haven store-of-value or unit-of-measure.
How does AAA Reserve have value?
There are two types of cryptocurrencies:
- Utility tokens
- Asset-backed tokens
Utility tokens, such as Bitcoin, have value because they are scarce (finite in supply) and have some purpose. For Bitcoin its issuance is limited to 21m, and it is used to store information on a blockchain.
Asset-backed tokens, such as AAA Reserve, have value because there is an asset (crypto or real) behind the currency. For AAA Reserve, the value is backed by investments in fixed income (e.g. loans and gilts).
How is AAA Reserve issued?
Anyone can request to buy new AAA Reserve coins. Arc Fiduciary Ltd — a ring-fenced entity — receives the subscription funds and issues AAA Reserve coins to the purchaser.
AAA Reserve coins are issued when three tests are met:
- Proof-of-stake: the purchaser of coin sends sufficient funds.
- Proof-of-identity: the purchaser passes regulatory tests, such as KYC and AML.
- Proof-of-reserves: the purchaser is paying the correct price per coin. This is the net asset value per coin (NAV). Which is the value of all the assets held by Arc Fiduciary Ltd divided by the total number of coins in issue.
New issuances can be unlimited, instantaneous, and non-dilutive for existing coin holders. This is a critical feature of AAA Reserve, and vital for any stablecoin.
What makes AAA Reserve stable?
AAA Reserve is stable because of the diversified nature of the underlying asset allocation and the price stabilising features of the coin.
What is the underlying asset allocation?
Funds received by Arc Fiduciary Ltd are allocated across the top 6 currencies (as reported by the Bank of International Settlements); and across a diversified portfolio of fixed income and loan investments.
Why diversify across multiple currencies?
A basket of currencies is less volatile than a single currency.
Also, the top 6 currencies could include cryptocurrencies in the future. So, the currency allocation strategy is future-proofed.
Why use fixed income and loans?
- To generate a return: for a coin to be stable in the long run, it must maintain its purchasing power (track inflation). So there needs to be a small return (e.g. 2% p.a.), which can be consistent. Fixed income the best asset class for this.
- Volume: the underlying asset class must be big, to enabling scaling. The fixed income market is measured in trillions of dollars.
- Bank deposits aren’t good for large sums: if you have a large amount of money — holding it is a problem. By depositing it in a bank, you are providing the bank with an unsecured loan — which means you are taking credit risk, but not getting paid for it. By using fixed income, you are effectively removing the cost of storage, and are being paid for credit risk.
In the future, as the crypto ecosystem develops, it is possible that fixed income investments are sourced from other participants, or entirely peer-to-peer.
If the value of the underlying assets grows stably and predictably, what happens to the price of AAA Reserve?
The price of AAA Reserve on exchanges is open to market forces. The construct of AAA Reserve provides holders of AAA Reserve with the confidence that the value of their holdings will fall within a narrow band relative to NAV.
There are three outcomes:
- Price = NAV: If, magically, the price always equals NAV, then nothing needs to be done:
2. Price is more than NAV: If the price increases above NAV on an exchange, then, at any time, people can buy newly issued coin at a price equal to NAV from Arc Fiduciary Ltd, and then sell it on the exchange at a profit. This rewards the community for keeping the price of AAA Reserve down:
3. Price less than NAV: Arc Fiduciary Ltd keeps an amount of its holdings in cash deposits and is willing to buy back AAA Reserve coins (price based on a formula — see later). If the price on an exchange falls, then anyone can buy AAA Reserve coins from the exchange, and sell at a higher price to Arc Fiduciary Ltd, and make a profit. This rewards the community for keeping the price up. Arc Fiduciary Ltd then burns the repurchased AAA Reserve coins.
Bringing these scenarios together, it enables the price of AAA Reserve to be stable relative to the NAV.
What if someone tries aggressively to short AAA Reserve?
As Arc Fiduciary Ltd has a limited amount of assets allocated to cash (i.e. less than 100% of total assets); then there is a short-run risk that Arc Fiduciary Ltd won’t be able to continue to support the price of AAA Reserve on the downside.
Arc Fiduciary Ltd offers to repurchase AAA Reserve coins at a reducing price as the cash reserves reduce. This means that each repurchase is increasingly profitable (e.g. buying at $0.40 when the NAV is $1.00 gives a profit of $0.60); and benefits all remaining holders of AAA Reserve coins — the profit from the repurchase increases NAV, and the repurchased coin is burned.
Therefore, the correct strategy under a short attack, is to keep your AAA Reserve coins, sit back, and relax. As this is the only scenario under which the NAV per coin will increase faster than normal.
Eventually, the short-speculator(s) will need to close out their position(s), at which point their total losses will fund the profits for everyone who continues to hold AAA Reserve.
Is AAA Reserve a security?
It depends on the jurisdiction. In most cases we expect it may be defined as a security of some description. This is the same for all asset-backed tokens. In Jersey, where AAA Reserve has been reviewed by the Jersey Regulator — the JFSC — AAA Reserve is classified as a debt security.
We embrace working with regulators and regulations for AAA Reserve, as we feel this is important to support stability — enabling regulatory certainty.
Is AAA Reserve decentralised?
There are elements of AAA Reserve which are centralised at the outset — which is a necessary requirement for any fiat-backed cryptocurrency — however, the road map intends to decentralise the construct as much as possible as the broader ecosystem develops.
Who created AAA Reserve?
AAA Reserve has been created in collaboration by experts in economics, investment, trading and technology. It is built by the community for the community.
To get involved, contact: hello[at]aaareserve.com
How can I find out more about ARC?
Please visit www.aaareserve.com to read the white-paper and find out more.
